Labor Productivity and Comparative Advantage – The Ricardian Model (International Finance)
The Ricardian model introduces international trade theory. This most basic model of trade involves two countries, two goods, and one factor of production, labor. Differences in relative labor productivity across countries give rise to international trade. This Ricardian model, simple as it is, generates important insights concerning comparative advantage and the gains from trade. These insights are necessary foundations for the more complex models presented in later chapters.
Learning Objectives of lecture:
- Explain how the Ricardian model, the most basic model of international trade, works and how it illustrates the principle of comparative advantage.
- Demonstrate gains from trade and refute common fallacies about international trade.
- Describe the empirical evidence that wages reflect productivity and that trade patterns reflect relative productivity.
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